The Great UMA Outsourcing Debate

NEW YORK-As unified managed accounts become more well known among investors and financial advisers, firms creating them are faced with questions of what functions to outsource, along with related technology issues and compliance rules, according to panelists at Financial Research Associates' "Unified Managed Account" conference here last week.

Many firms want to create a UMA and recognize the increasing need to offer the product to clients, but "there is a still lack of knowledge among firms on how to make that happen," said Joseph Mrak, senior vice president and general manager at BISYS Wealth Solutions. Firms are wondering what are all the components needed to start, he said.

A UMA is a single account with an overlay manager. Designed to offer broad asset allocation, it combines investment vehicles, such as exchange-traded funds, mutual funds and alternative investments all in one portfolio.

UMA assets are expected to reach $29 billion this year, up 21% from $24 billion in 2001, according to Tiburon Strategic Advisors. And by 2011, they are expected to soar to $117 billion.

There are many different options that firms have when starting a UMA. One option is a TAMP, or turnkey asset-management program. A type of overlay solution, a TAMP is a quick way for firms to learn about the industry. However, it doesn't provide the offering manager much control of the portfolio, plus it is expensive to run, thereby offering slimmer margins, Mrak said.

Other firms opt for an overlay platform, in which companies hire sponsor firms to develop customized UMA programs, while using the sponsor firms' operational infrastructure, investment mangers and products. The overlay option is a quick-build program, which offers product customization and high-end features, but, again, companies do not have control of the investment managers. A number of firms, such as Smith Barney and UBS, are deciding on this choice.

Another alternative is a hybrid approach that firms such as Morgan Stanley have adopted in which the asset manager uses its own products, while the outside sponsor provides an overlay manager watch out for wash sales and tax management opportunities. This allows companies to control their focus and design and own their own UMA label to differentiate their platform.

Still, it can be inefficient for to rely on an outside party, Mrak noted. Also, in-house overlay management is becoming more popular, and more and more firms are leaning toward this option, as technology advances and becomes less fragmented, he added.

There are also other factors to consider, and "firms must always keep in mind the end consumer," said Rob Klapprodt, president of Vestmark Software of Wakefield, Mass.

The UMA can become very complex because there needs to be customization and personalization of the account in an efficient manner, said Candyce Cohen, vice president of Odyssey Financial Technologies.

There needs to be a focus on standardizing multiple account types, such as broker accounts with trust accounts, and ways to harmonize across the back-office platforms, she said.

There are technological complexities that firms must address, as well. Some challenges include keeping up with new releases and products in the space, Mrak said. The technology market for UMAs is fragmented, and changes are always occurring, he said.

Firms also must assess whether they should buy the technology or get it from a third-party provider. Firms should evaluate where they want to make investments in the UMA business and where they see their value add, Mrak commented.

Tools needs to be developed to make the account opening process more electronic and easier, Cohen added.

Also, "we are seeing a lot of interest internationally," she said. As the interest in international investing continues, UMA platforms must be able to handle multiple language and currency. This is useful not just for reporting, but for avoiding trading errors as well, Cohen noted.

Firms must also be cognizant of compliance requirements related to UMAs. There is a lot of ambiguity surrounding regulation disclosures, and firms should be in talks with their compliance group, Klapprodt said.

The compliance team should feel comfortable with marketing materials and proposals, he said. When in doubt, disclose it and highlight it, he said. Firms have to continually review and maintain investment policies, Cohen added.

Gary Jones, vice president for industry operations at the Money Management Institute of Washington, said MMI has formed a committee looking at creating standards for the industry. "Standards need to be adopted sooner rather then later, as it will be harder to fix issues later on," he said.

One primary focus is on the definition of the UMA. There is much confusion around the actual meaning, and there are many names in the marketplace for the UMA, he said. The committee, which is made up of 23 people and has met twice, is discussing issues of model maintenance, data and reporting and portfolio manager swaps, he noted.